Expecting Inflation

01 may. 2021 5 Consumo de tiempo Read

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  • Employment fell by 207,100 jobs in April 2021 and the unemployed rate rose to 8.1%.
  • Inflation rose to its highest in nearly a decade to 3.4% in April 2021.
  • Preliminary estimates show that retail sales decreased by 5.1% in April 2021.



Despite expectations already in place for higher inflation, financial markets were still unprepared for the steep jump in the latest readings. In particular, U.S. annual inflation surged to 4.2% in April 2021, marking the largest increase in consumer prices seen since 2008. Financial market volatility ensued as investors grappled with the notion that higher inflation may not be as shortlived as initially foretold by central banks. The main concern was that an overheating economy would force central banks to hike interest rates, curbing the recovery just as it starts to gain momentum. Throughout, the Federal Reserve has remained confident that this bout of higher inflation will be transitory, a combined result of supply chain issues, pent-up demand and “base effects” from calculating inflation off last year’s depressed levels. Other central banks have also echoed the same messaging, easing some investors’ worries.

Inflation in Canada was not as strong as seen in the U.S. (+3.4%) as a third wave of infections hindered Canada’s reopening, but consumer prices still rose to their highest level in nearly a decade. In addition, the Bank of Canada also faces pressure from a hot housing market that it has helped perpetuate with near-zero interest rates. The central bank has cited concerns that Canadians are overreaching when buying homes and that in some markets Canadians are rushing to buy partially because they expect prices to continue rising. As such, the Bank of Canada has said the biggest domestic vulnerabilities to the Canadian financial system are the imbalances in the housing market and high household indebtedness. However, it is also unable to take steps to cool the market aside from issuing stern warnings. With more than just the housing market to look after, the central bank is committed to keeping interest rates low to support the entire economy until a complete recovery is underway.

An added consequence of higher prices has been surging construction costs. Earlier in the month, steel and lumber prices in the U.S. had more than tripled since late 2020 but appear to have since moderated slightly. Part of the reason for the pricing increase is the temporary closure of steel and lumber mills during the pandemic, resulting in currently limited supply. With restrictions easing and development resuming, producers were unable to keep up with the surge in demand. While some U.S. projects have cancelled as a result of the increased costs, the North American commercial real estate development boom is still expected for 2021 as most major projects are expected to continue.



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